Housing: Mr Key – Get on the Programme

Housing: Mr Key – Get on the
Programme

If kicking the can down the road and
avoiding at all costs dealing with issues head on is an art
form, then Prime Minister John Key is a master of the
art.

We have seen this on graphic display this past month
or so over housing issues, from the time of the announcement
late October by Deputy Prime Minister Bill English.

Key
was standing beside English at this announcement, looking
decidedly uncomfortable.

The announcement by English was
very clear with a sound and appropriate focus on land
supply, infrastructure financing, process and construction
costs.

This “focus” is essential in addressing these
serious issues effectively.

It followed the release of the
Productivity Commission Report March and extensive internal
and external Government discussion. In turn, this was
preceded by near eight years of public conversation of these
issues, since the time of the release of the first Annual
Demographia International Housing Affordability Survey
back early 2005.

The NZ Planning Institute publicly
stated early 2007 it supported the Demographia Surveys.
Through 2007 and 2008, the National Party, then in
Opposition, strongly supported the need to deal with housing
issues. Phil Heatley completed a Study Tour to the USA and
UK and Gerry Brownlee headed up Parliaments Commerce
Committee Housing Inquiry.

The National Party campaigned
on this issue (and others of course) in the lead up to the
2008 election – and won.

There was a widespread
expectation the new National led Government would
pragmatically start on the path of dealing with these
issues.

So there has been a long history to this
issue.

By mid 2009 the new Prime Minister John Key had
scuttled the idea – out of the media and public spotlight.
The current behaviour by Key on housing issues is very much
a replay – but this time, in the public spotlight.

It is
not a pretty sight.

This followed a Cabinet meeting
earlier in the month, where the collective decision of
Cabinet was clearly supportive of English’s proposals. The
convention of “collective responsibility” is that once a
decision is made, all Cabinet members (including the Prime
Minister of course) are duty bound to support the
decision.

Failing to do this is a very serious matter –
and particularly so for a Prime Minister. He must of course
be seen, both within Government and outside of it, as a
“team player”, so that trust and confidence of his
colleagues – and most importantly his fellow citizens - is
maintained.

It is important for the Government to send a
clear message the “housing bubble days” are over – and
that the Government across the board is determined to deal
with supply impediments.

And further to this, that over a
reasonable and realistic time frame, New Zealand housing
returns to normal affordable levels. Indeed where they had
been for previous generations of New Zealanders.

It was
also very important the Local Government people got the
“clear message” they (in the main the larger ones) need
to start on the path of better controlling their costs, so
they are in a position to once again, meet their
infrastructure responsibilities to their communities.

The
housing issue at its core is very much a Local Government
costs out of control problem.

Getting the housing market
properly sorted out is going to be a long haul exercise –
likely 10 years or more – because the industry pricing and
performance is so degraded.

To best illustrate this, new
starter housing on the fringes of the affordable US housing
markets is in the order of $US 600 through $US 700 per
square metre all up. In contrast here in New Zealand it is
anything between $NZ 2.500 (Christchurch) through $US 4,000
per square metre all up (Auckland). What is considered
executive standard housing in New Zealand is starter quality
housing in the United States.

The stress on Christchurch
households is the same as the stress on Auckland households
because of the much lower median household incomes in
Christchurch ($56,000 in comparison with approximately
$72,000 for Auckland).

So fringe new stock is being put in
place in both cities for a stratospheric 10 to 11 times
median household incomes ( it should be about 2.5 Median
Multiple – refer Definition). It is not generally the
younger first home buyers purchasing this new stock, but
older “propertied” buyers, leveraging off their bubble
equity.

The Median Multiples for both cities are similar
– with Auckland at 6.4 and Christchurch at 6.3
(Demographia Survey – data 3rd Quarter 2011).

Therefore
Prime Minister John Key is being deliberately misleading on
these issues, by stating this is an “Auckland problem”.
It is not – it is country wide.

The fringes of a City
are its only sufficiently responsive supply / inflation
vent. A Definition of an Affordable Housing Market is
clearly set out on the Performance Urban Planning ( www.PerformanceUrbanPlanning.org )
website ...

DEFINITION OF AN AFFORDABLE
HOUSING MARKET

For metropolitan areas to rate as
'affordable' and ensure that housing bubbles are not
triggered, housing prices should not exceed three times
gross annual household earnings. To allow this to occur, new
starter housing of an acceptable quality to the purchasers,
with associated commercial and industrial development, must
be allowed to be provided on the urban fringes at 2.5 times
the gross annual median household income of that urban
market (refer Demographia Survey Schedules for
guidance).

The critically important Development Ratios for
this new fringe starter housing, should be 17 - 23% serviced
lot / section cost - the balance the actual housing
construction.

Ideally through a normal building cycle, the
Median Multiple should move from a Floor Multiple of 2.3,
through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7
- to ensure maximum stability and optimal medium and long
term performance of the residential construction
sector.

Building affordable housing today is
a very ho hum and formulaic business. There is nothing
confusing about it – unless one is a politician or
bureaucrat, it would appear.

So with the Median Multiples
of Christchurch and Auckland in the mid 6.0’s (and
climbing) and new fringe stock going in at approximately 10
/ 11 Median Multiple (when it should be 2.5), it is not too
difficult to understand why Deputy Prime Minister Bill
English is so deeply concerned.

With increased demand (and
persistent constraints on new supply), there is enormous
scope to pump the Multiples trough to 8.0 and 10.0. Veteran
property investor Olly Newlands is of the view that the
stage is set to double the prices over the next few years.
These figures suggest he may well be right.

Already –
the total value of our generally poor quality housing stock
is about 3.0 times GDP (it should not exceed 1.5 times –
and the USA and Houston are currently 1.1 times
approximately). Rather amusingly, the total value of New
Zealand’s housing stock is more than that of Houston with
its 6.1 million people and an economy of $US384 billion
(ours about $US125 in GDP PPP terms) growing at about 8.5%
per year.

It is remarkable how Mr Key does not appear to
recognise how dangerous this is – while Deputy Prime
Minister Bill English with the majority of his Cabinet
colleagues appear to.

The Labour solutions are so “off
the wall” they are best ignored.

Labour seems committed
to take pride in being complete economic illiterates. After
all – their incompetence triggered the 2002 through 2007
inflating housing bubble. They should be grateful to the
current Government for at least endeavouring to sort out
Labour’s housing mess.

One would expect John Key to
understand the housing market better than Labour politicians
– but alas, he is struggling.

It needs to be explained
to Mr Key the fringe Multiples are so elevated above where
they should be, that it is going to be a very long haul
exercise indeed, bringing them back to where they should
be.

The numbers speak for themselves. It is too dangerous
to delay decisive action any longer – and indeed most
unfortunate we didn’t start on this path following the
2008
election.

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